NovaLoca Blog

The outlook for UK commercial leisure property remains challenging, says Savills in its latest review of the sector, but it does expect to see a staged recovery for this market at a regional level from 2012 onwards. The firm says many of the factors dampening consumer confidence – such as high inflation, concerns about public-sector cuts, weaker housing prices and rising unemployment – will soften next year and enable a recovery to begin.

This recovery is, however, expected to be “firmly two-speed” – Savills says that by 2014 the rate of income growth in London, the fastest growing region, will be double that of Northern Ireland, the slowest. Leisure operators are already factoring this into their expansion plans. Savills notes that while such a phased recovery is nothing new, and that London saw one of the largest falls in real incomes, so “it is inevitable that it will see the strongest recovery”. It adds, however, that “for leisure operators and retailers alike it is important to note that Greater London and the East are the only regions of the UK where real income growth will have returned to its boom level by 2015.”

Tenant demand in the restaurant and pubs markets remains selective, but some operators are carrying out expansion programmes. Investor demand has risen sharply, both for prime leisure investments and where there are asset management opportunities. Savills doesn’t expect banks to flood the market with distressed property, but it notes signs that they have begun to take “more decisive action”.

Savills says prime leisure yields are now around 6.25%, which is a discount of around 100bp to their prime open A1 retail equivalent. It feels that a more sophisticated buying market since its previous review of the sector in Q4 2010 “has recognised that the leisure occupational market has remained robust. There are of course exceptions, but in the main, cinemas, restaurants and café bars, have been trading well through difficult economic conditions, whereupon occupiers still have demand for strong trading locations.”

“As we have commented many times before, when the market turns for the better, the level of growth in the leisure sector will not keep pace with its high street or retail warehouse equivalent, but for the moment, its defensive qualities are proving attractive,” it adds.

The latest research from the Local Data Company shows that there is a very wide range in shop vacancy levels across the UK. The LDC visited 400 town centres and out-of-town retail parks and shopping centres during the second quarter of 2011 and found vacant retail property levels ranging from 40% at Rawtenstall to just 1% at Winton near Bournemouth.

“These extremes appear in many aspects of a centre,” says the LDC. “For example, the number of independent shops as a percentage of the total in Barnoldswick is 90% whilst the percentage of multiple (chain) shops in Salford is over 70%.”

While the closure of outlets by multiple retailers hit the headlines during the quarter, the LDC has noted an improvement in the level of opening of independent retail premises from a low in 2008-2009. The national shop vacancy level remained stable during the quarter at 14.5%, as other sectors expanded, including supermarkets, betting shops, charity shops and pound shops. The LDC also points out that the announced closure of 4,500 shops in total by multiple retailers so far this year represents just 0.6% of the stock that it tracks.

Another reason why the overall vacancy level has remained steady is the increasing stabilisation of a large number of centres, with half of all the centres visited during Q2 reporting a change in vacancy levels within a +/– 2% band. However, the LDC cautions that churn data (showing openings and closures as a percentage of the total) indicates that the picture may be becoming more negative and the extremes in performance may be widening.

The property industry has reacted positively to the government’s release yesterday of its draft National Planning Policy Framework – an overhaul of the UK’s planning regulations that seeks to simplify and streamline the current system. More than a thousand pages of rules have been condensed into a 52-page document.

The British Property Federation said it would give the draft framework its “ringing endorsement” as it closely followed the Practitioners Advisory Group on the issue, which had called for a streamlined policy in order to promote economic growth.

The BCSC’s executive director Edward Cooke said that there was much to commend in the draft, but called on the government to reinforce its commitment to the “town centres first” approach to development. He said that without this, “the argument about development will simply shift from planning to the courts as debate over the strength of sequential testing as a mechanism of controlling development becomes subject to appeal and judicial review. This will further delay important town centre regeneration.”

The Financial Times notes that planning minister Greg Clark is expected to announce today further details of how any planning application will be dealt with by councils within a year, as part of the government’s proposal to make councils put growth at the centre of their plans. The new framework says there must always be a presumption towards “sustainable development”, the paper notes.

Savills’ head of planning, Roger Hepher, says the NPPF “seeks to keep what is generally regarded as good about existing planning policy, whilst introducing a decisive shift towards promoting development and prioritising economic growth.”

While cautioning that the framework is still at the draft stage, he expects it to lead to a "significant upturn" in many forms of development activity, adding: “We can expect to see a good many planning applications in the near future, as developers take advantage of the Government’s pro-development stance. We must hope that ministers will have the conviction to enforce the new approach through their own decisions on specific schemes."

Lambert Smith Hampton reports that distressed sales are gaining pace in the UK, with distressed investment transactions accounting for just under £1bn of the £6.6bn seen in the second quarter of this year. The firms’ UK Investment Transactions research for Q2 2011 shows that more than half of the distressed assets sold during the quarter were in the UK regions. However, in terms of value, more than 90% of the total came from deals done in London.

Ezra Nahome, CEO of LSH, says banks have been consistently reducing their exposure through consensual sales, but during the quarter there was also an increase in receivership disposals and the firm expects this to occur more and more during the next year. “The banks have focused considerable resource at their loan book and, given they have their ‘arms around the problem’, decisions are definitely being taken to sell,” he added.

The £6.6bn of investment transactions recorded in Q2 compares with £8.4bn in the first quarter, but that first-quarter figure includes the sale of the Trafford Centre for £1.6bn. Central London and South East office space remained dominant, with 30% and 50% growth in investment activity respectively, LSH notes. “Central London offices continue to be the lead indicator for the whole of the UK commercial property market with yields now below 5%,” the firm points out. This low yield demonstrates that investors regard the Central London market as a safe haven and shows the finite number of quality assets in the market, Mr. Nahome noted.

During the second quarter, investors continued to show interest in the distribution warehouses and logistics markets, as they did in Q1. High-street shops were, as expected, the weakest performers in Q2, LSH says, while retail warehousing bucked the trend and was highly sought after – second only to Central London offices.

Prime occupier markets were weaker overall during the second quarter, says the latest Prime Rent and Yield research from CBRE, as a result of the renewed decline in rental values after a period of rental stability. The decline in prime rents in the retail sector more than outweighed modest gains in the offices and industrial sectors, leading to an overall 0.1% decrease at the All Property level. However, Central London office and retail occupier markets remained buoyant, the firm notes.

CBRE says the consumer sector remains fragile, as seen in the deterioration in the high street, shopping centre and retail warehouses sectors within retail. This is having an effect on occupier space requirements. Yields came in by 9bp for retail warehouses during the quarter; industrial property yields were more or less flat.

Prime yields dipped 5bp overall during the quarter, with the All Property average prime equivalent yield remaining at 6.1%. CBRE says such slow downward pressure “is characteristic of a market where investor appetite is slowly dwindling”. The firm notes that transaction volumes were weak during Q2, with only £6.2bn purchased during the quarter (according to PropertyData) compared with £10.1bn in the first quarter of the year.

The Times reports today that Union Investment, one of Germany’s largest property fund managers, is poised to fund the speculative development of a STG 150m office building in Manchester. It is in advanced talks with developer Allied London about forward-funding the 300,000 sq ft scheme at Spinningfields, thus providing the finance for construction at a time when bank lending for such deals is still scarce.

The newspapers points out that such a huge speculative deal would be a boost to confidence for the property market in the region.

The proposed building is to be sited at 1 Hardman Square and is one of the few remaining plots still undeveloped in the Spinningfields office district. The Times says the value of the completed building would be between STG 150m and STG 160m.

The Western Corridor region – encompassing west London and the Thames Valley – saw a strong increase in active named occupier demand during the second quarter, says recent research from Jones Lang LaSalle. The firm says occupier demand for offices in the area jumped 45% quarter-on-quarter, but take-up was down in the Western Corridor region at 169,000 sq ft, which JLL says reflects continued weak occupier confidence and “deals taking time to complete”.

JLL notes that there is a further 239,000 sq ft of space currently under offer and expects to see more consolidation – particularly in the Pharmaceutical and ITT sectors – which will drive leasing activity during the next year.

JLL says the overall office vacancy rate for the Western Corridor was 14.2% in Q2, with a number of buildings having changed use from office to residential. Grade A supply fell to its lowest level since 2008 to reflect a vacancy rate of 5.9% overall, but this figure is just 3.3% in west London, compared with 8.6% for the Thames Valley.

During the second quarter, more than 3.2m sq ft of requirements for office space over 5,000 sq ft was recorded, up 45% from Q1 and 17% higher than the second quarter of 2010. Active named demand levels were up 51% compared with the five-year average, JLL says, “with requirements once again dominated by the Manufacturing and Services sectors, which accounted for around 85% of all active named demand in the Western Corridor”.

James Finnis, head of JLL’s national office agency team, says there is “a good pack of deals” now in solicitors’ hands and, with active demand growing, the firm expects this to lead to more deals in the second half of the year. He noted that JLL saw an increase in the number of large-scale requirements in Q2 2011, “with 18 active requirements for over 50,000 sq ft of office space, compared with just 13 in the first quarter of the year. The average requirement size has also increased by 12% to around 40,000 sq ft,” he added.

Land Securities today said it had stepped up its activity in retail development, mostly in edge-of-town locations, and now had a £275m, 1m sq ft pipeline of opportunities to meet the growing demand from food and fashion retailers for space.

Chief executive Francis Salway said: “The outlook for development in London remains attractive and, despite the mixed messages in the retail sector, our leasing activity demonstrates that the stronger retailers are looking to take new space.”

Land Securities announced a fall in the vacancy rate in its like-for-like portfolio to 3.9% in the first quarter of its financial year, compared with 4.2% at the end of March. It said this void level included units let on a temporary basis at 1.0%, while a further 0.4% was under offer. Units in administration in the like-for-like portfolio were 0.6% at the end of June compared with 0.4% at the end of March.

The group achieved £9.5m of lettings in total during the quarter with a further £5.4m in solicitors’ hands. It said it had also recycled capital during the period through profitable asset sales – total property sales were £177.1m at 7.9% above March 2011 valuation at an average yield of 4.1%, and spending on new developments. It reported capital expenditure on developments in the quarter of £42.2m and acquired property acquisitions of £18.5m at an average yield of 2.1%.

The yield gap between prime and secondary retail property widened further during the second quarter of 2011, as investors continued to seek good-quality, well-let properties – assets that are in short supply. DTZ’s Q2 Retail Investment Market research shows that institutional investors again drove transactions in shopping centres, high-street locations and retail warehouses, but their focus was on prime.

“With banks stepping up their workouts, and institutions avoiding non-core properties, secondary high street stock saw yields continue to shift outwards in Q2,” the firm notes.

The firm expects in particular that the gap between yields on prime and secondary shopping centre stock will widen further, with several significant asset sales that are about to complete set to provide evidence for this trend.

Weaker occupational demand, the steady stream of retailers going into administration, and widespread downsizing means that investors’ appetite for riskier secondary assets is still low, DTZ says. Private-equity buyers are seeking out assets that have potential for repositioning, but pricing is an issue.

Martin Davis, head of DTZ’s UK markets research team, says “Ailing retailers looking to downsize are likely to retain their prime locations because they will bring in more money – despite the higher rents. Retailers will be able to justify the rental costs because consumer spending in these prime locations is so resilient. As a result, the rental growth performance of secondary retail assets is deteriorating compared to prime.”

DTZ says retail trading conditions are unlikely to improve in the next quarter and expects vacancy rates on secondary high streets and shopping centres to rise as occupational demand continues to fall. It expects REITS to become more active in the shopping centre and retail warehousing markets during Q3 while institutions are forecast to remain the driving force in the high-street investment market, paying aggressive prices for prime stock.

Construction activity in the private-sector office market is beginning to pick up, bucking the weak trend in other sectors, says Savills in its latest Commercial Development Activity report. Five of the nine sub-categories of commercial development reported growth in activity last month, with private-sector offices recording the strongest expansion. But the three public-sector sub-categories all reported accelerating declines in activity.

The growth in private-sector activity offset the contraction in the public sector, leading to a June net balance of +0.8% in the index for overall commercial property development activity compared with –3.4% in May. Around 22% of the developers surveyed recorded a rise in overall activity during June, compared with 21% reporting a fall.

The index tracking expectations showed a slight drop in confidence, with the three-month outlook for the UK commercial industry overall coming in at –1.4 for June, after +7.7 in May. About 18% of those surveyed expected activity to decrease during the next quarter, while 17% forecast an increase. Again, the restricted level of bank lending was cited as a key reason for a lack of confidence.

Michael Pillow, head of building consultancy at Savills, expects the improving trend in private-sector offices to be sustained as rental growth begins to recover in the best regional office markets, “though debt availability will remain a significant dragging factor,” he added.